Beginning of the End – Russia and Shale Oil

This is the first in a short series that discusses recent events as they relate to the analysis developed in The Accidental Superpower. Each of these developments — and dozens more — are symptoms of an underlying change the global order.

Part 1: Shale and the Breakdowns to Come

The Russian economy is a mess. The ruble keeps plumbing new lows, lending across the country has all but stopped, sanctions (and counter-sanctions) are raising the specter of Soviet-style goods shortages, and even the Russian government now predicts 2016 will bring with it the worst recession since at least 1998.


Many — rightly — see the economic carnage being wrought in Russia as an outcome of the Putin government’s adventures in Ukraine and subsequent economic sanctions against Moscow. But that is only part of the story.


In Russia the core issue isn’t so much Ukraine as it is shale. U.S. energy output has skyrocketed and North America has already achieved functional energy independence. The consequent shockwaves through global energy markets are hiving what used to be the largest importing market — the United States — off of the global market. One consequence among many is collapse in oil prices. Russia has never — in any age — managed to maintain a strong economic structure without robust commodity export income. The ruble crash is still only in the very early stages. Cascading defaults are now inevitable.


Nor will the carnage be short lived. U.S. shale is – somewhat unbelievably – still in its infancy. The merging of horizontal drilling and hydraulic fracturing technologies is really only a decade old and technological improvement is only now reaching critical mass. As of December 2015 full-cycle break-even costs in the three main U.S. shale oil basins — Bakken, Permian and Eagleford — are for the most part below $45 a barrel. Stunning new technologies are being developed, bundled into packages, and deployed as companies seek to find ways to produce more from fewer wells to save money.


And “full-cycle cost” is no longer a good measure of the total cost to drill a well as it includes everything from the drilling rights to the cleanup. As lower energy prices force consolidation, the remaining U.S. shale operators will acquire the single most expensive aspect of their operations — those drilling rights — at steep discounts. The dizzy year-on-year expansion in U.S. oil output is slowing, but it shows few signs of reversing.


Base Week: September 30, 2005

More broadly, there is not a single oil producer anywhere in the world that has budgeted for an oil price below $50, with most — and most notably, Russia, Iran and Venezuela — requiring prices to be roughly double their current level. Many of these countries’ spending is so high because they have come to rely on petrodollars to fund social programs or military funding that stabilizes their political systems. While it may take some time, civil breakdowns and economic meltdowns are the new normal for a vast raft of commodity-based countries

The Nuclear Deal and Iran’s Vulnerability

57The Iranian nuclear deal is moving forward as President Obama just recently secured the last vote necessary to prevent the US legislature from blocking the agreement. This agreement gives Iran some significant concessions regarding uranium enrichment and there is considerable hand-wringing in the United States over Iran’s nuclear potential.
But the truth is that I find it unlikely that Iran actually wants a bomb. Should Iran nuclearize, it would encourage Iran’s regional rivals to follow suit. As Iran is clearly the region’s superior conventional power, all nuclearization would do is neutralize its current advantage.


So if nukes don’t serve Iran’s long-term strategic needs, why bother? It’s less about the nuclear weapon and more about the nuclear program.


Having a nuclear program allows Iran to sue for terms with the US (and to a lesser degree, with Israel). And it looks like the strategy is paying off. A degree of collaboration between Washington and Tehran is in both powers’ best interest. But the Iranian nuclear deal is really a product of Iran’s vulnerability and this deal presents an opportunity to lessen that vulnerability and prepare for the next phase of the American empire.


Iran’s leverage in the global system was the result of its ability to threaten the most important oil producing region in the world. But the shale revolution is bringing an end to the era of U.S. preoccupation with oil — in the Middle East or elsewhere.


This geopolitical shift not only eliminates Iran’s leverage, but it also becomes vulnerable as so much of its economy is dependent upon maritime exports of oil. Moreover, as the U.S. withdrawal accelerates, Iran finds itself overextended – not against an easily-distracted America.
Instead Iran faces an awkwardly consolidating Iraq, an awakening Turkish giant, a frightened but focused Israel, a battle hardened Pakistan, a desperately violent Russia and a Saudi Arabia who is willing to write any check if it will weaken Iran.


The question — as in many things — is timing.


Americans haven’t yet internalized that North America’s dependence upon foreign oil is down by roughly two-thirds from what it was seven years ago, and that by 2017 that dependence will be approaching net zero. The speed at which the region is becoming irrelevant to U.S. interests will at some point be matched with a tidal shift in American policy in the region. In the latter half of 2015, therefore, we’re in this odd geopolitical moment where the U.S. doesn’t care all that much — but it does not quite yet not care at all. For Iran this means that the window to extract concessions is very, very small. If the current nuclear deal does not go through for whatever reason, the next round of talks will be with a United States that is largely immune to whatever Iran can throw at it.


Iran’s regional rivals both fear this development and are hoping/trying to reshape the regional geopolitic to create an American-style containment of Iran…without the Americans.


  • Israel is playing the emotional card to try to persuade Americans that their Middle East policy should be all-Israel, all the time. The strategy obviously didn’t fly with the Obama administration, and the groundswell of American public support Israel was hoping for just hasn’t manifested. And so Israel has had little choice but to reach out to allies old and new, most notably Turkey and Saudi Arabia.


  • Turkey thought it could convince the Americans to bear the burden of burning through ISIS. That strategy too has failed and now Turkey is reluctantly and fearfully preparing to relaunch regional imperial strategies it last used over a century ago. Any meaningful Turkish resurgence will almost by definition wreck a panoply of Iranian interests. Ankara is very ready for that shift militarily and economically, but it’s barely considered it philosophically or intellectually. Everything with the Turks these days is softly softly. But one day the dam of restraint will break and the Turks will surge. The only question is where will they surge first? As a vastly inferior power to Turkey, the Iranians are particularly obsessed with that question.


  • As a country with no military tradition worthy of the name, Saudi Arabia is by far the most terrified of American disengagement and so hopes to scuttle the entire American-Iranian entente. Not because Riyadh thinks it will keep the Americans involved, but because it will hamstring Iranian options. This strategy includes pushing full force against Iranian interests in every regional theater — Lebanon, Gaza, Syria, Iraq, Kurdistan, Yemen, Iran and Pakistan — so that Iran bleeds from a dozen cuts. It is now the Saudis — not the Chinese or Russians or Iranians — that have the most violent and aggressive foreign policy in the world.